Sarkozy Should Curb Credit to Tame Home Prices, OECD Says

President Nicolas Sarkozy’s government should consider curbing mortgage lending to counter rising home prices in France, the Organization for Economic Cooperation and Development said.

“There is a risk that a prolonged period of easy finance could result in a price bubble,” the Paris-based OECD said in a report released today. “If real-estate prices were to continue to rise rapidly, the authorities should implement explicit macro-prudential measures to limit the distribution of credit to households,” it added.

The comments, set out in the OECD’s Economic Survey of France, highlight concern that rising house prices may pose a risk to French banks and the recovery from the worst recession in more than half a century. Bank of France Governor Christian Noyer also warned last month that property prices may be on the verge of a “correction” as euro-area interest rates rise.

While house prices across France rose only 1.5 percent on average in 2010, prices in the Paris region jumped 15.7 percent to a record 7,645 euros ($10,789) per square meter, according to the national residential real-estate brokers’ lobby, FNAIM. Paris property prices have surged 40 percent since 2005.

Growth Forecasts

The OECD report said that France’s economy may fail to grow as quickly as the government expects at a time when Sarkozy is gearing up for an election in April 2012. The report said the economy is set to expand 1.6 percent this year, less than the 2 percent predicted by the Finance Ministry, as unemployment remains stuck at 9.5, the OECD said.

“A moderate recovery is underway, though the major recession is going to leave lasting traces on public finances and employment,” the OECD said.

OECD Secretary General Angel Gurria, presenting the report today at a press conference in Paris with Finance Minister Christine Lagarde, said that “signs of very strong growth in the first quarter” means that France may meet the 2 percent growth target for the year.

Sarkozy, who is trailing rivals in the polls, needs to loosen labor laws, slash government borrowing and consider limiting mortgage lending to stave off threats to growth and revive the nation’s growth potential, according to the report.

‘Intermediate’ Position

The OECD, which advises its 34 member governments on policy, said that France is in an “intermediate” position among the group in terms of its ability to rebound after the 2008 financial crisis.

With gross government debt of about 83 percent of annual output and a persistent trade deficit of about 2 percent of gross domestic product, the government must press ahead with reforms, according to the report.

The French government should “ensure that public finances do not jeopardize macroeconomic stability and continue implementing structural reforms that spur employment and the economy’s productive potential,” the OECD said.

The group praised Sarkozy’s 2010 law that raised the minimum retirement age to 62 from 60 as “a serious step forward” in improving public finances, while saying more work on pensions remains to be done.

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